By rushing to give indemnity to trustee directors amid the ongoing legal cases, Franklin Templeton has added fuel to the fire
As you read this, Franklin Templeton Trustee Services Private Limited would have gotten ahead in its plan to indemnify all directors of the company to the ‘fullest extent permitted’ in connection with liability that any of them may incur in connection with the controversial, and now legally contested, decision to wind-up six debt schemes of Franklin Templeton Mutual Fund taken on April 23, 2020. The timing of the move to give such indemnity is contentious, and, as some might say, even provocative.
In a truly ‘extraordinary’ general meeting (EGM) called on Thursday, June 18, 2020 at 10:00 a.m. through video conferencing, Franklin Templeton Trustee Services would have got its proposal approved to widen the scope of the indemnity that covers any such liability that may result from regulatory actions and apply in the case of negligence, default, breach of duty or breach of trust by any indemnitee covered and include for the advancement or direct payment by the company, of any reasonably incurred legal or travel costs incurred by any such indemnitee. An indemnitee is a person (here Franklin Templeton Trustee directors) protected by, or benefiting from an indemnity.
For those who are not aware, an indemnity is a promise by one party to compensate another for the loss suffered as a consequence of a specific event, usually called the ‘trigger event’. Thus, an indemnity operates as a transfer of risks between the parties. Essentially, indemnity changes what they would otherwise be liable for or entitled to under a normal damage claim.
If you recall the April 23, 2020 notice of Franklin on winding up the 6 debt funds, it was ‘Franklin Templeton Trustee Services Private Limited’ which had decided to wind up Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund. This was done pursuant to the provisions of regulation 39(2)(a) of the SEBI (Mutual Funds) Regulations, 1996 (Mutual Fund Regulations). So, trustees took the final call.
It was the trustees of Franklin Templeton Mutual Fund in India, that said, after careful analysis and review of the recommendations submitted by Franklin Templeton Asset Management (India) Private Limited (the AMC), and in close consultation with the investment team, that an event has occurred, which requires these schemes to be wound up. They claimed this is the only viable option to preserve value for unitholders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances. The role of trustees does not merely end with announcing a wind up of specific schemes. The Trustee or the person(s) authorised by are also supposed to realize and / or dispose-off the assets of the schemes in the best interest of the unit holder(s). The frustration of investors has come to the fore after it was revealed that some of the schemes may take more than five years time to return money going only by the maturity profiles. Some expressed their disgust on social media, some chose to be silent, and a handful went to the courts seeking remedy.
The move to announce winding up was quite shocking for the entire MF industry because no other AMC announced a similar move to wind up some of the longest-running schemes, managing thousands of crores, even though all of them faced the same ‘unprecedented circumstances’. Something was unique about the FT decision, and it was not pleasant. Yes, heightened redemptions were happening during the national lockdown period, but no one took a step like Franklin. Some AMCs even resorted to legal inter-se transfer of debt securities among their own schemes, but no one threw in the towel like Franklin. Either of two possibilities exist: Franklin was being extra-cautious, or simply unable to manage the crisis.
The trustee, the sponsor and the asset management company (AMC) are jointly and severally responsible for compliances with provisions of SEBI (MutualFunds) Regulations. While trustees are not professionally equipped to look at operational aspects of investments in day-to-day functioning of a mutual fund scheme, they are an important supervisor. Simply put, the duty of a trustee is to act as a prudent man of business in managing assets on the behalf of beneficiaries/investors. Franklin MF has repeatedly argued that it was forced to take the decision to wind up the 6 debt funds because of illiquidity in debt markets; however, atleast, some investors have begged to differ and instead have accused Franklin MF of making poor investments. This is where the role of trustees has come into question repeatedly.
Did the trustees act fairly and neutrally in conducting their fiduciary duties? Such questions will be asked now more than ever. By hastening to give indemnity, Franklin has added fuel to such fire. In fact, there are many pointed questions that can be asked today about the FT trustees. Do they expect severe penalties? Can the trustees be indemnified retrospectively for actions they may have taken sometime back? Why make this move now? Unfortunately, it is also true that the exact role of trustees and even their existence was mostly unknown to investors before the winding up event happened. How many investors knew the trustee names? According to Zaubacorp information, Franklin Templeton Trustee Services’ directors include Sanjaya Shyam Johri, Sandra Martyres, Arvind Vasudeo Sonde, Alok Sethi and Shilpa Prasad Shetty. That said, the lack of investor knowledge about trustees and their duties does not absolve trustees of their responsibilities.
In the MF industry, trustees are already indemnified against acts of omission. In fact, the Articles of Association of Franklin Templeton Trustee Services offers indemnity cover to every director against liability in respect of matters which arise from acts or omissions of such person in the ordinary course of discharging his or her authorised duties in good faith and in the best interest of the company. But this move by Franklin will likely give them a much larger shield of protection. Some are already comparing this to people seeking anticipatory bail!
When asked Franklin downplayed the indemnity move, saying it is standard practice to offer directors and officers indemnification in the performance of their duties. A Franklin Templeton Spokesperson said: “We confirm that a notice has been issued to conduct an Extra-Ordinary General Meeting of the members of Franklin Templeton Trustee Services Private Limited with regard to indemnification of the Directors of the Company. It is standard practice to offer Directors and Officers indemnification in the performance of their duties.”
The timing of the latest move to give indemnity to directors of Franklin Templeton Trustee Services Private Limited evokes questions. Indemnity is being given to the directors in the backdrop of litigation on the move to wind up 6 debts funds managing nearly Rs 26,000 crore. Market and fund regulator SEBI is also said to be conducting a probe into the dealings of the 6 debt funds proposed to be shut down by Franklin. The indemnity move has to be seen in this backdrop.
The framework that connects trustees to investment decision makers is the AMC/MF governance structure. A strong governance structure provides the mechanism for decision makers to function together effectively. In comparison, a weak governance structure leads to confusion and acrimony. Trustees sit at the apex of the fund’s organizational hierarchy and it is expected that trustees will ensure an important fiduciary duty to the fund by ensuring a governance structure that is both strong and sound. As the legal cases against Franklin’s controversial decision to plan shut down of the 6 debt funds come up for hearing, the role of trustees will be scrutinised deeply by courts.
Franklin Templeton Trustee Services is no stranger to controversies. Specifically in an adjudication order (AO) dated November 29, 2016, Sebi had held, Franklin Templeton Trustee Services, among others, guilty of constituting an “Informal Group” as Investment Committee and had said the inclusion of International CIO in the investment committee is in violation of regulations. That transgression appears too small in the latest case of Rs 26,000 crore worth funds being proposed to be shuttered down. Indemnity may ultimately be a face-saver for trustees, but any blemish will stay on. Ultimately they had the fiduciary duty to protect the interest of the unitholders, and not the AMC.
In the picture: Franklin Templeton Global president and CEO Jennifer M Johnson.
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